A problem with using residual income is that a corporation with a:
A)high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio
B)high return on sales always has a higher residual income than a corporation with a smaller return on sales
C)larger dollar amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets
D)None of these answers is correct.

Question

Quizplus · Accepted Answer

Residual income is calculated as the net operating income that an investment center earns above the minimum required return on its operating assets. Therefore, a corporation with a larger dollar amount of assets is likely to have a higher residual income, assuming the same rate of return, because the base amount for calculating residual income is larger.

A Problem with Using Residual Income Is That a Corporation